A Monopolist Would Like to Practice Third-Degree Price Discrimination

question 45

Essay

A monopolist would like to practice third-degree price discrimination. Its first group of customers is represented by the demand equation, Q_D1 = 10 - P₁. The second group is represented by the demand equation, Q_D2 = 10 - 2P_2. Assume marginal costs of $4 in both markets. Compare the profit the monopolist would make as a single-price monopolist to what it would earn with third-degree price discrimination. Based on your calculations, does it make sense for this monopolist to price discriminate?

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Definitions:

Agents

Individuals or entities authorized to act on behalf of another person or organization in business or legal matters.

Employees

Individuals who are hired by an employer to perform specific duties or services in exchange for remuneration, forming the workforce of a company or organization.

Principal

In legal and financial contexts, the main party to a transaction or the original amount of money invested or loaned, before interest.

Independent Contractor

An individual or entity contracted to perform work for another entity as a non-employee, thus not entitled to employee benefits and subject to different tax treatment.